RCom to demerge tower biz, sell stake

Reliance Communications, India's second-biggest mobile operator, has decided to demerge its telecom tower business -- Reliance Infratel (Rel Infra). The company's board has approved a proposal to restructure the ownership of the tower firm to help create an independent tower company.

In a statement on Monday, RCom said it would implement the ownership restructuring proposal through "demerger and/or other suitable value-creating options". It did not elaborate.

The company said it was in "advanced stage" discussions with several local and international strategic and financial players to sell a stake and expects to announce a deal shortly.

The company said the move would greatly benefit RCom through substantial debt reduction, and enhanced financial flexibility. "Consideration for sale of stake in the tower company would be received in cash and stock," the company said.

Rel Infra had a debt of Rs 15,000 crore, according to a draft red herring prospectus filed by the company in September. According to latest available data, the debt of RCom, which holds 95 per cent stake in the company, stood at Rs 39,162 crore in 2008-09.

In addition, the company has spent Rs 8,585 crore for securing the rights to offer third generation (3G) services in 13 circles. Post 3G expenses, Reliance's net debt is four times its Ebitda (earnings before interest, depreciation, taxes and amortisation) level, said a report by CLSA.

Executives of the two companies, who declined to be identified, indicated that a number of options were being worked out. According to one option, the entire assets and liabilities of Rel Infra will get transferred into a special purpose vehicle.

Sources familiar with the developments said telecom infrastructure service provider GTL will hold 26 per cent in the SPV. A 24 per cent stake will be held by the Anil Ambani group entities, with an understanding that their holding will not cross 26 per cent. The existing financial investors of Rel Infra who are on board since July 2007 -- George Soros, HSBC, Fortress Capital, New Silk, Galleon, DA Capital and GLG Capital -- can continue with their 5 per cent holding. For the remaining 45 per cent block, talks are on with a clutch of Gulf-based strategic telcos such as Saudi Telecom along with their promoters and other financial investors.

Now that RIL is also aggressively pursuing its telecom plans, it may also be an equity partner in that consortium. But keeping in mind the significance of having an "independent" tower company, RIL's investments may be routed through promoter-entities, just like the Anil Ambani group, investment bankers said.

In a statement, RCom Chairman Anil Ambani said: "I am personally looking forward to an era of healthy cooperation and collaboration with existing and new players, especially recent winners of 3G and BWA (broadband wireless access) spectrum."

Analysts believe this will give enhanced neutrality to its tower business. "The new company will be an independent tower company and not a subsidiary to RCom. Demerging tower infrastructure from the core business increases the chances of competitors (other telecom companies) to access services as tenants," said Rahul Jain, analyst at Angel Broking.

Rel Infra has 50,000 towers across the country, and plans to add 25,000 towers more in two years. It is the exclusive provider of passive telecom infrastructure for RCom and has entered into a 10-year master services agreement with it.

Rel Infra had tried to enter the capital markets twice. "The IPO is appearing difficult and they had to monetise assets in some way. Telecom business is expected to become much worse in the next eight to 10 months, so it is better to monetise now as the valuations may go down further," said Jagannadham Thunuguntla, equity head at SMC Capitals.

Rel Infra filed a DRHP in 2009 where it was expected to raise around Rs 5,000 crore. The company had filed a DRHP in 2007 as well, and then, divested 5 per cent stake in a pre-IPO placement to institutional investors, and raised around Rs 1,400 crore.

The deal had given a valuation of around Rs 1 crore per tower. But, valuations of towers have fallen since. The latest deal in the telecom tower business, where Tata Teleservices Maharashtra sold its tower business to Quippo, valued a tower at around Rs 52 lakh.

In a related development, RCom approved the sale of up to 26 per cent stake in the company to a strategic or private equity investor. The company's stock went up 3.7 per cent in today's trade to close at Rs 179 a share.